DALLAS–U.S. underwriters can save money and avoid some litigation problems by committing to the concept of contract certainty, as insurers in the United Kingdom have done, an industry professional advised at a conference here.
David Casement, vice president, general counsel of Chubb Insurance Company of Europe, provided that counsel at the Inland Marine Underwriters Association's 75th Annual Conference.
Mr. Casement told attendees that in the UK the insurance industry has made a commitment to contract certainty as part of the country's compliance with the Financial Services Authority's (FSA) principles-based regulatory scheme.
In essence, he said, insurers are responsible for policing their own conduct in line with 11 principles spelled out by the FSA. A failure to self-regulate would bring disciplinary action from the FSA. Contract certainty, Mr. Casement said, is one way in which the insurance industry is encouraged to police itself.
But, he added, contract certainty is a modern concept that is relevant to insurers outside the UK as well.
The FSA defines contract certainty as the creation of certainty over underwriting exposures for insurers and of terms of coverage for insured prior to the inception of coverage.
Mr. Casement said contract certainty shifts the business of insurance from its long-held method of "deal now, details later" to one where insurers and insureds iron out the details of a given risk up front.
The idea is that overall risks will be reduced if details regarding coverage are known from the outset. Insurers understand better what they are covering, and insureds have a greater knowledge of what coverage they are buying. This should lead to a cleaner claims experience throughout the policy period, Mr. Casement said.
He cited the extended World Trade Center litigation in the wake of 9/11 as an example of what happens under the current business scheme when both parties do not establish the details of a contract in advance.
In July 2001, Mr. Casement said, leaseholder Larry Silverstein asked Willis to secure coverage. The coverage was provided under the broad "wilprop" form, but some carriers assuming the risk insisted on using their own forms. Since not all forms were finalized by the terrorist strikes on 9/11, questions arose as to whether the attacks constituted one event or two, and an extended legal battle ensued.
Mr. Casement said there is no guarantee that a legal fight would have been avoided had contract certainty been established in this instance. "Certainty," he said, does not necessarily mean "clarity." But, he added, the issues may have at least been resolved more quickly.
The results of continuing business under the concept of "deal now, details later," he said, include inaccurate pricing and reserving, late invoicing, claims issues, and legal battles.
And while he acknowledged that converting to a practice of contract certainty may be costly for insurers, Mr. Casement argued that the cost of not converting will be far greater going forward.
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